|CORAM:||Joginder Singh (JM), Sanjay Arora (AM)|
|SECTION(S):||14A, Rule 8D|
|CATCH WORDS:||exempt income|
|COUNSEL:||Sanjay B. Sawant|
|DATE:||November 17, 2014 (Date of pronouncement)|
|DATE:||November 24, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 14A Rule 8D: No presumption can be drawn that investment in tax-free securities has come from own funds. The amount of disallowance has to be added to the book profits u/s 115JB|
(i) As regards the claim qua disallowance of interest expenditure, the argument of sufficient capital, so that the same must be presumed as having been applied toward investments yielding tax exempt income, misses the point completely. The matter has to be decided on the basis of facts and not presumptions. Until and unless therefore it is shown and, again, with reference to the assessee’s accounts, that the investments have been financed from own capital, so that no part of the borrowed capital has been utilized for the purpose, no such presumption would hold, and the rule of apportionment, prescribed by r. 8D, mandatory w.e.f. A.Y. 2008-09, shall apply. The decision in the case of Reliance Utilities & Power Ltd. (supra) stands rendered in the context of section 36(1)(iii), and would thus be of little relevance. It needs to be appreciated that the disallowance u/s.14A is a statutory disallowance, constituting a complete code in itself. The said decision was cited before, and stands discussed by the hon’ble jurisdictional high court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT  328 ITR 81 (Bom). Where therefore the assessee is able to show, with reference to its accounts, of the borrowed capital having financed a particular asset (or asset class), the interest cost relatable thereto would necessarily have to be consider as expended toward the same. So, however, if, as claimed, the borrowed capital is in the form of dedicated funds, i.e., specified activities and/or assets, so that the same stands utilized for the same purpose/s, and which would be where the terms and conditions of the borrowing have been met, there could be no presumption with regard to the borrowed funds having been used for any purpose other than the same and, accordingly, no part of the interest could be considered as having not been utilized for business purposes and, hence, toward financing the investment/s. The presumption of proportionate funding, on which the formula prescribed u/r. 8D(2)(ii) is premised, would not obtain in that case.
(ii) The only other issue arising in this appeal is with regard to the adjustment to the book profit qua the disallowance effected u/s. 14A of the Act. The disallowance of expenditure, interest or administrative, is only of that incurred by the assessee. If the same is not in the books of account, where we wonder it is? Both the income and expenditure, determining the net profit, which forms the basis for computing income under the Act, are only as per the books of account. The provision of section 14A only codifies the law, which is otherwise inherent in tax jurisprudence, that only the net income (i.e., net of the expenditure), from whatever source, is to be brought to tax and, consequently, only the net income, where tax-exempt, is to be so. Further, rule 8D prescribes a method/s toward determining the said income, i.e., on net basis, providing a uniform basis for ascertaining the amount of expenditure liable to be excluded in computing the income chargeable to tax. The legal basis for the relevant adjustment, i.e., qua the expenditure relatable to the exempt income, in determining the book profit, which is an alternate method of taxation, i.e., where the income computed under the regular provisions of the Act falls below the prescribed percentage of book profit, is per clause (f) of Explanation 1 below sub-section (2) of section 115JB.